Contacts:
Great Portland Estates plc	+44	(0)	20	7647	3000
Toby Courtauld, Chief Executive
Nick Sanderson, Finance & Operations Director Stephen Burrows, Director of Financial Reporting & IR
Finsbury Group	+44	(0)	20	7251	3801
James Murgatroyd
Gordon Simpson

There will be a live conference call at 9.00am today, which will include a Q&A session with the GPE management team, on the following numbers:

 

Standard International Access

+44 (0) 20 3003 2666

 

UK Toll Free

0808 109 0700

 

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A video presentation of the results by Toby Courtauld and Nick Sanderson is available, along with accompanying presentation materials and appendices, at:

www.gpe.co.uk/investors/latest-results

We will also be holding an investor & analyst event regarding the launch of our Roadmap to Net Zero Carbon by 2030 in early 2021.

For further information see www.gpe.co.uk or follow us on Twitter at @GPE_plc

 

 

Disclaimer

This announcement contains certain forward-looking statements. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Actual outcomes and results may differ materially from any outcomes or results expressed or implied by such forward-looking statements.

 

Any forward-looking statements made by or on behalf of Great Portland Estates plc ("GPE") speak only as of the date they are made and no representation or warranty is given in relation to them, including as to their completeness or accuracy or the basis on which they were prepared. GPE does not undertake to update forward-looking statements to reflect any changes in GPE's expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based.

 

Information contained in this announcement relating to the Company or its share price, or the yield on its shares, should not be relied upon as an indicator of future performance.

 

To view the accompanying graphics please paste the below into your web browser 

http://www.rns-pdf.londonstockexchange.com/rns/9001E_1-2020-11-10.pdf

 

 

Half Year Results

 

Our market

Introduction 

London's commercial real estate markets slowed dramatically in the first half of the year, as governments across the world reacted to stem the tragic human cost of the COVID-19 pandemic. In the UK, despite government measures to cushion the economic impact of the lockdown, the UK economy has dipped into an unprecedented recession. Whilst economic activity in recent months has picked up, along with business and consumer confidence, the UK's PMI Employment Index remains weak, suggesting further fragility to come. Against this recessionary backdrop, activity levels in both the central London occupational and investment markets during the period were close to historical lows. The continuing restrictions imposed by the government, and the uncertainty regarding both their duration and extent, continue to adversely impact normal patterns of activity and business in central London. Whilst a recent uptick in activity appears to be supporting pricing in the investment market, occupational markets have softened as many businesses have put leasing decisions on hold until the outlook clears.

For the remainder of the financial year, we expect that activity in our markets will be driven by the progress and impact of the pandemic. Given this challenging economic and operational context, we expect capital values and rental levels to decline as London's property markets adjust to a global recession. Despite this backdrop, we remain well placed. Our low financial leverage will enable us to both weather market volatility and take advantage of any dislocation should it arise. Whatever the outcome, we remain confident that London will remain a leading global city and will maintain its ability to attract businesses, capital and talent from around the world and the office will remain an integral part of its vibrant economy.

Global economic recession

The first half of 2020 was marked by an abrupt slowdown in global output with most governments partially closing economies to prevent the spread of COVID-19. As a result, developed and emerging-market economies alike experienced sharp declines in GDP. In the UK, GDP is estimated to have fallen by a record 19.8% in the quarter to June, following a fall of 2.2% in the quarter to March. Whilst economic activity has subsequently picked up as lockdowns have eased, the pace of the recovery has lost momentum as a number of countries have seen a resurgence in case numbers. Looking forward the outlook is hard to read as economic conditions are closely tied to the trajectory of the pandemic and the development of an effective treatment, both of which are difficult to predict. Moreover, a number of much needed UK government support schemes will be withdrawn over the coming months and significant political risks remain including the implications of the recent US election result and the conclusion of UK trade negotiations with the EU. Against this backdrop GDP forecasts indicate that the UK's economy will shrink by 10.1% in 2020, followed by 6.4% growth in 2021. If these estimates are correct, it is likely to be 2022 before the UK recovers the GDP lost to the crisis.

Limited activity in occupational markets

Our occupational markets were very subdued over the six months to 30 September 2020, with many businesses pausing leasing activity to take stock of quickly evolving economic conditions. As a result, central London office take-up was 2.2 million sq ft, a record low for a six-month period and considerably lower than the preceding six months and the ten-year average of 6.3 million sq ft. CBRE estimate that central London active demand at September totalled 5.5 million sq ft, a reduction of 2.4 million sq ft since 31 March 2020. Reduced levels of take up and demand have led to greater central London availability which increased to 19.9 million sq ft over the six months, up from 13.7 million sq ft at 31 March 2020 and ahead of the ten-year average of 14.2 million sq ft. The vacancy rate has also moved up, from a low base, to 6.5%. Whilst the amount of available space has increased, the proportion that is either newly completed or under construction remained near historical lows at 26% (5.3 million sq ft). Against a backdrop of softening rental values, this continued scarcity of high quality space has provided relative support for prime rents.

Looking forward, the future supply of new space remains limited. In central London, CBRE estimate that 14 million sq ft of new space is currently under construction, of which 44% is already pre-let. Whilst CBRE estimate that 32 million sq ft of new speculative space could be delivered before the end of 2025, construction has yet to start on 75% of that space and, in our view, current levels of market uncertainty will likely result in schemes being delayed or alternative business plans being pursued. As a result, we are continuing to see encouraging levels of pre-let interest in our near-term development schemes as larger occupiers look beyond COVID-19 to ensure they secure the best space for their business. 

West End occupational market

Over the six months to 30 September 2020, West End office take-up was 0.8 million sq ft, down 61% on the preceding six months. Current availability of 6.0 million sq ft has moved up and is 1.6 million sq ft (or 27%) above the ten-year average. Vacancy rates remain low at 4.9% at 30 September 2020, with Grade A vacancy estimated by CBRE to be only 2.9%. CBRE reported that prime office rental values reduced over the last six months by £8.50 per sq ft to £101.50 per sq ft, with rent frees three months higher at 26 months on a ten-year lease.

In the past six months the UK retail environment has faced the perfect storm of a temporary forced closure during lockdown, lower consumer spending and an acceleration in the ongoing structural shift to on-line sales. City centres have been particularly badly impacted as consumers have avoided busy locations, particularly if they are reliant on public transport. Levels of footfall in the West End have fallen dramatically and, whilst they recovered somewhat when the lockdown eased, they reached only 44% of pre COVID levels. Unsurprisingly this has had a detrimental effect on London's key retail streets. Vacancy on Oxford Street, Regent Street and New Bond Street has risen to 12.5%, 9.0% and 19.0% respectively, with prime Zone A rents on Oxford Street and Bond Street lower at £631 per sq ft and £1,702 per sq ft respectively. We expect the outlook for central London retail to remain challenged until confidence in domestic and international travel returns, and more of London's vibrant workforce returns to central London.

City, Midtown and Southbank occupational markets

Over the six months to 30 September 2020, City office take up of 0.8 million sq ft decreased by 72% on the prior six months and remains below of the ten-year average of 1.3 million sq ft. Availability increased to 8.8 million sq ft (from 5.9 million sq ft at 31 March 2020), with the amount of space under offer at 0.9 million sq ft, 31% below the 10-year average. The City vacancy rate was greater than that of the West End at 8.1%, although Grade A vacancy was estimated by CBRE to be 5.3%, up from 3.5% at March. CBRE also reported that City prime rental values fell marginally to £71.00 per sq ft, down £2.00 per sq ft from March 2020, with rent free periods on a ten-year lease increasing to 27 months (24 months at 31 March 2020).

Take-up in Midtown and Southbank was 0.2 million sq ft, down from 0.6 million sq ft on the preceding six months. Prime office rental values reduced by £5.00 and £4.50 per sq ft to £77.50 and £65.50 per sq ft for Midtown and Southbank respectively. Rent frees increased to 26-27 months on average on a ten-year lease.

Less active investment markets

As the UK lockdown progressed investment market activity slowed considerably. Buyers paused to take stock as financial conditions deteriorated, and vendors, who in the most part are not facing financial difficulties, were unwilling to test uncertain markets. Furthermore, restrictions in international travel hampered the ability of more willing buyers to inspect potential acquisitions and conduct effective due diligence. As a result, office investment deals in the six months to 30 September 2020 were £1.7 billion, down 75% on the prior six months and down 76% on the ten-year average.  

More recently activity levels have picked up. Today we estimate that there is currently £9.1 billion of stock on the market available to buy, up from £3.6 billion in May, whilst the weight of money seeking to invest is also up at around £38.6 billion. Demand for London real estate has remained robust particularly for high quality assets. London offices remain attractively priced when compared to other major global cities, the excess returns between real estate and government bonds have never been higher and the pound remains weak against other currencies. As a result, at 30 September 2020, prime office yields were unchanged at 3.75% and 4.00% in the West End and City respectively, according to CBRE. Given the greater distress in retail markets, retail yields softened over the period, with CBRE reporting that retail yields moved out 25 basis points to 3.50% for Regent Street and Oxford Street and 2.75% for Bond Street.

Near-term market outlook

Given the cyclical nature of our markets, we actively monitor numerous lead indicators to help identify key trends in our marketplace. Over the last six months, our property capital value indicators were largely unchanged and continue to provide limited market visibility. However, we expect investment activity in the central London commercial property market to pick up from its recent low level of turnover in part due to the record real yield spread over gilt yields. Prime yields are currently trending flat and we expect that to continue for high quality assets, although it is possible that there will be some yield expansion for assets of a more secondary nature. Whilst the occupational market is more challenged and we have already seen a softening in ERVs, particularly for retail space, we are encouraged by the level of enquiries for both well designed new office space and for our flex offer. Looking forward, given the economic outlook, and rental performance of the portfolio in the first half of the year, our rental value movement range for the financial year to 31 March 2021 is between minus 5% and minus 10%, predominantly driven by the ongoing negative outlook for retail property.
 

Longer-term outlook and the future of the office

The COVID-19 pandemic has accelerated a number of trends in our key markets, the most pronounced to date being the detrimental impact it has had on the retail, hospitality and leisure sectors, particularly in large urban centres. However, we are also seeing early shifts in the nature of demand for offices. We stressed the growing importance of flexibility, sustainability, technology and increasing levels of service provision at our Investor and Analyst Event earlier in the year, and COVID-19 has pushed these themes further up occupiers' and investors' agendas.

Service provision has been key to supporting our occupiers through the pandemic. Our Occupier Services team has been working closely with our customers to keep offices open, COVID Secure, and more recently to help them return to their offices safely. We have been utilising technology, via our 'sesame' app, to enable touch free access to buildings, and using sensors to monitor air quality to ensure adequate fresh air flow.

Looking beyond the current disruption, we expect the experience businesses and their workforces have had through the pandemic will have some lasting influence on how they use offices in the future. Once the government requirement for office staff to work from home has passed, we expect the need for greater workforce agility to remain. A recent survey by Savills suggests that, post pandemic, the majority of workers would like to work from home only one or two days a week, with only 6% with a preference for full time. Against this backdrop, successful office spaces will need to fulfil our natural desire to congregate and provide an environment for collaboration, creativity and common purpose. Whilst this may require less traditional desk space, it will require a greater variety of communal spaces to enable and encourage the activities that are not best achieved remotely.

In our view, as we look forward, the best buildings will need to provide flexible work settings, support the health and wellbeing of employees, promote sustainability and be more human and connected to the communities in which they sit. Buildings that cannot meet these criteria risk being stranded. This plays to our strengths. We have a portfolio that is well suited to this evolving demand, with 82% of units in our portfolio being less than 10,000 sq ft, more than 93% of the portfolio at sub ten storeys in height and an average building size of around 60,000 sq ft. Moreover, we have a track record of being at the forefront of technological change; our launch today of our Roadmap to becoming a net zero carbon business by 2030 further demonstrates our focus on sustainability and wellbeing, and we have the team and the skill set to deliver the spaces occupiers want.

 

 

Our business

 

Our business is accompanied by graphics (see Appendix 1 and 3)

Our leasing activities

 

During the six months to 30 September 2020, despite the impact of COVID-19, we continued to lease ahead of ERV. Key highlights include:

 

·           nine new leases were signed during the first half (2019: 29 leases), generating annual rent of £6.6 million (our share: £6.1 million; 2019: £8.4 million), market lettings 4.6% above March 2020 ERVs;

·           five rent reviews securing £3.7 million p.a. (our share: £3.7 million; 2019: £10.8 million) of rent were settled during the half year, representing an annualised increase of £0.2 million p.a., or 7.8% above the previous passing rent and 2.5% above the ERV at the review date;

·           total space covered by new lettings, reviews and renewals during the first half was 136,400 sq ft (2019: 358,200 sq ft);

·           £0.6 million of reversion was captured (our share) in the six months to 30 September 2020, with a further reversionary potential of £5.0 million; and

·           93% (by area) of the 40 leases with breaks or expiries in the twelve months to 30 September 2020 were retained, re-let, or are under offer or under refurbishment, leaving only 11,800 sq ft still to transact.

Key leasing transactions

The table below summarises our leasing transactions in the period:

Leasing Transactions		Three months ended 30 September 2020	Six months ended 30 September 2020	Six months ended  30 September 2019
New leases and renewals completed
Number		5	9	29
GPE share of rent p.a.		£1.8 million	£6.1 million	£8.4 million
Area (sq ft)		32,700	77,300	220,100
Rent per sq ft (including retail)		£55	£78	£76
Rent reviews settled
Number		3	5	23
GPE share of rent p.a.		£3.0 million	£3.7 million	£10.8 million
Area (sq ft)		15,000	59,100	138,100
Rent per sq ft (including retail)		£69	£62	£85

Note: Includes joint ventures at share

Notable transactions during the six months included:

·           the largest leasing transaction was the pre-letting to Exane, the European equities business, of the top three office floors of 1 Newman Street (39,970 sq ft), on a 15-year lease (no break) at an average rent of £100 per sq ft, 14 months before completion. The development is progressing well and we look forward to welcoming Exane to their new home later next year;

·           at City Tower, EC2, we agreed a flex letting with Nikko Asset Management on the fifth floor (6,360 sq ft) based on a five-year term (no breaks), 2.8% above the March 2020 flex ERV; and

·           at Walmar House, 288/300 Regent Street, W1, we settled a rent review with Richemont UK Limited, increasing the annual rent to £2.7 million, an increase of 3.8% on the previous passing rent and 0.6% above ERV at the review date.

At 30 September 2020, the Group's underlying vacancy rate increased to 2.6%, or 8.3% when including recently completed developments (31 March 2020: 2.0%). Group rent roll has decreased by 4.4% to £96.4 million (31 March 2020: £100.8 million), largely due to planned vacancies ahead of proposed developments. The average rent across our office portfolio was £54.80 per sq ft, up from £53.40 per sq ft at 31 March 2020.

At 30 September, 26% of the Group's rent roll is subject to a break or lease expiry in the next 18 months. More than a quarter of this is from properties in our near term development pipeline where we will take vacant possession ahead of proposed works. Of the remainder we have identified a number of opportunities where we can improve the income security and with our strong track record of retaining occupiers are confident in doing so.

Since 30 September 2020, our leasing activity has continued:

·           we have completed 3 new leases generating £0.9 million (our share: £0.6 million) of annual rent (16,400 sq ft), with market lettings 0.5% above March 2020 ERVs; and

·           a further 92,600 sq ft of space is currently under offer which would deliver approximately £6.8 million p.a. in rent (our share: £4.1 million), with market lettings 13.9% ahead of September ERVs or 5.5% above March 2020 ERVs.

Innovating with our flexible space

COVID-19 has accelerated demand for flexible, fitted spaces which we have been delivering since 2018. Our flexible offerings currently comprise 13% of our office portfolio, across our own fully-fitted flex space (111,500 sq ft) and revenue share partnerships (143,700 sq ft) operated by Knotel and Runway East. Our flex space remains 77% let, whilst occupancy across the partnerships space has now settled at around 72%, a marginal reduction from around 80% prior to lockdown. In November, we completed our first new Flex+ offering, delivering 16,300 sq ft at Dufours Place, W1. This new Flex+ space further enhances our current Flex product giving occupiers added service provision and communal facilities. Occupier interest in this new space is encouraging and we are currently appraising a further 140,900 sq ft of potential space to expand our offer.

Rent collection and working with our occupiers

The trajectory of COVID-19 continues to dominate the economic backdrop and disrupt the activities of many of our occupiers across London. During the period, of the £43.8 million rent billed (our share) in the March and June quarters, to date we have collected 70%, or 83% after the utilisation of rent deposits. The retail, hospitality and leisure sectors have been most affected, impacting our collection rates at 63% compared to 93% for all other sectors (after deposits).

The most recent 29 September quarter saw an improvement. Including 100% of joint ventures, 61% of quarterly rents due (which represents 70% of the quarter's rent roll) was secured within seven working days (June 2020: 57%), which has now risen to 76%. Of the further 30% of our rent roll on monthly payment terms, we have now collected 93%. In total 80% of the September rent has been collected or is covered by a rent deposit (this compares to 72% at the equivalent point in time for the June quarter).

At 30 September 2020, we held rent deposits and bank guarantees totalling £18.5 million (June 2020: £21.6 million), of which we anticipate that we will be able to utilise £2.6 million against our outstanding September rent.

For those occupiers who have been unable to pay their rent, we are implementing measures to help support them through these unprecedented times. Accordingly, on a case by case basis, we are currently offering occupiers facing cash flow difficulties monthly payment terms, deferral of rental payments or rental holidays, as appropriate. During the period, four of our occupiers went into administration, representing only 1.3% of our rent roll for the period.

All of our office buildings remain open, with levels of occupier utilisation rising to around 30% of full occupancy immediately prior to the start of the latest Government enforced lockdown last week.
 

Development management

 

Since March 2020, we have successfully completed two developments and have continued to make good progress at our one remaining scheme on site, 1 Newman Street and 70/88 Oxford House, W1. Beyond this, the team continues to prepare a further ten schemes with prospective deliveries from the mid-2020s and beyond.

 

Two development completions; 43% pre-let, further 8% under offer

At The Hickman, E1, we completed the new 75,300 sq ft Grade A office and retail building in September, delivering a profit on cost of 13.0%. This highly sustainable BREEAM 'Excellent' refurbishment is also technologically advanced, utilising both our app 'sesame' and digital twin technology to improve the occupier experience and minimise operational carbon emissions. The building is now 28% under offer and there continues to be good occupier interest in the rest of building.

At Hanover Square, W1, after completing the retail units earlier this year, we have continued with sectional completions of the offices and residential apartments over the past few months, with the full scheme completed in early November. The pre-let office floors have been handed over to the incoming occupiers, KKR and Glencore who have commenced their fit-outs and Canali's new store on New Bond Street has recently opened. The scheme has delivered 221,500 sq ft of new space, comprising 167,500 sq ft of offices, 41,300 sq ft of retail and restaurant space and 12,700 sq ft of residential apartments. Interest in the remaining 56,000 sq ft of office space across the scheme continues to be strong. Whilst we are having a number of discussions with prospective occupiers on the remaining retail units (36,400 sq ft), we expect leasing activity to be subdued until retail sales and footfall return to more normalised levels. However, we remain optimistic on their leasing prospects given the units are located on one of the world's premier retail streets, with attractive relative pricing and a unit sizing that is appropriate to their target market.

We have also been extremely pleased by the high level of demand for the six residential apartments, which are located on the corner of New Bond Street and Brook Street. All the apartments were placed under offer to individual buyers only eight days following the sales launch at the full asking price, equating to approximately £32 million. In total, the scheme is now 55% let by ERV and is expected to deliver a profit on cost of 10.3%. The development is owned in the GHS Partnership, our 50:50 joint venture with the Hong Kong Monetary Authority.

One committed scheme, due for completion in 2021 and already 31% pre-let

At 1 Newman Street & 70/88 Oxford Street, W1, construction of the new building is progressing well. After the building topped out in June, the exterior curved corner window panels have been installed and the majority of the façade is now complete. The building will deliver 81,600 sq ft of new offices and 37,900 sq ft of retail space directly opposite the Dean Street entrance to the Tottenham Court Road Crossrail station and completion is targeted for Q2 2021. Following the pre-let of the upper three floors to Exane in May, the building is now 31% pre-leased and interest in the remaining office floors remains encouraging. However, we expect the pre-leasing of the retail space to be more challenging in the near term given the impact of COVID-19 on the wider UK retail environment and the opening date of the central section of Crossrail being pushed back to mid-2022. As retail demand has softened, so have retail rents and yields on Oxford Street. As a result, the anticipated profit on cost of the scheme has reduced to 0.7%.

At 30 September 2020, the two committed development properties on site (Hanover Square, W1 and 1 Newman Street & 70/88 Oxford Street, W1) were valued at £519.3 million and required £31.5 million (both our share) of capital expenditure to complete.

 

Substantial development pipeline

We continue to prepare our three near-term schemes for redevelopment and we have received planning permission to allow us to commence our comprehensive repositioning of 50 Finsbury Square, EC2 in early 2021. The highly sustainable, 127,500 sq ft major refurbishment, will see the office floor plates extended within the existing frame of the building, a large reception with a concierge as well as an improved retail, leisure and amenity offer.

Together with New City Court, SE1 and City Place House, EC2, our near-term schemes will deliver 821,900 sq ft of new Grade A space and we have strong levels of early occupier interest across all three schemes.

Beyond our near-term schemes, we have a further seven schemes in the medium-term pipeline. Taken together, our total development programme (including our one remaining scheme on site) totals 1.5 million sq ft and covers 40% of GPE's existing portfolio and will provide the bedrock of our growth over the coming decade.

Investment management

 

For the majority of the period, investment market turnover was slowed by the impact of COVID-19, with many vendors reticent to market assets against an uncertain backdrop. Despite activity recently picking up, particularly for long-let, high quality buildings, opportunities providing attractive value continued to be limited. In particular, assets with repositioning and/or development opportunities, the sort of assets that we typically look to buy, remain scarce at prices that in our view fairly reflect their risk adjusted returns. We will remain disciplined. Any potential purchase needs to outperform the assets we already own and, with our existing portfolio stacked with opportunity, the hurdle is high. Furthermore, we have both the financial firepower and the team to exploit any market weakness should it arise and we continue to closely monitor the market with £1.2 billion of potential acquisitions currently under review.

Sustainability, community and people

 

Our Roadmap to Net Zero

Building on our Sustainability Statement of Intent "The Time is Now" launched in May 2020, we have set out how we will deliver the first pillar of our statement of intent - to decarbonise our business by 2030.

We will:

1.   Reduce the embodied carbon of our developments and refurbishments;

2.   Reduce the energy intensity of our investment portfolio;

3.   Invest in on-site renewable energy sources; before

4.   Offsetting our residual carbon.

To reduce the level of offset that will be required in 2030 for us to reach net zero, we have set an internal carbon price of £95 per tonne to attach a meaningful financial impact to our emissions. The internal carbon price will be applied to:

·      the embodied carbon from our development schemes, calculated at practical completion; and

·      operational emissions from our investment portfolio - the first qualifying year being the year ending 31 March 2022. 

The proceeds generated from our carbon pricing will form our Decarbonisation Fund which will be operational from April 2021. The fund will be used to finance the deep retro-fit needed to reduce emissions from our buildings, support investment in on-site renewable energy supplies and fund research into low carbon solutions.

Our communities

During the period we fully deployed the GPE COVID-19 Community Fund, donating £325,000 to vulnerable groups most impacted by the COVID-19 pandemic. The Fund was originally seeded with £280,000 raised through a combination of Board Director bonus reductions and fee waivers to the equivalent of at least 20% salary or fees for three months, along with significant contributions from all other GPE Executive Committee members and Group matching. The remainder of the funds were donated by GPE employees with all amounts raised matched by the Group.  

Funds were allocated by the GPE Community and Charities Committee. In line with our purpose and community strategy, donations were made to 28 charities with a strong presence in London which are being particularly impacted by COVID-19, with a particular focus on homelessness, mental health, vulnerable groups and education.

Our people

In the summer, we ran our second employee pulse survey to understand how we are performing against our Employee Engagement Index and Values, as well as to understand how the GPE team adapted to working from home during the UK lockdown. We had a very strong response rate with 91% of the team taking part and we were delighted with the results. Our overall Employee Engagement Index rose from 91% to 95%, with 96% of respondents recommending GPE as a great place to work and 98% stating that they believe in what we are trying to achieve at GPE. Furthermore, whilst the impact of COVID-19 had disrupted working patterns, 97% of employees felt that they had been supported by GPE during the COVID-19 pandemic. Over the coming months we will use the insight that the survey has provided to inform future engagement activities and further improvements across the business.

None of our employees have been furloughed and the Group has no current plans to access any UK Government COVID-19 funding.

Valuation

 

Valuation is accompanied by graphics (see Appendix 2)

The valuation of the Group's properties was £2,490.5 million as at 30 September 2020, reflecting a valuation decrease of 6.6% on a like-for-like basis since 31 March 2020. At 30 September 2020, the wholly-owned portfolio was valued at £1,863.9 million and the Group had three active joint ventures which owned properties valued at £626.6 million (our share) by CBRE.

 

Market uncertainty reducing values

The key drivers behind the Group's valuation movement for the six-month period were:

 

·           rental value decline - since the start of the financial year, rental values decreased by 3.9% on a like-for-like basis, with our office portfolio marginally down by 0.7% and our retail portfolio reducing by 13.0%;

·           higher investment yields - equivalent yields increased marginally by 5 basis points over the period. At 30 September 2020, the portfolio true equivalent yield was 4.7%; and

·           portfolio management - during the period, 14 new leases, rent reviews and renewals were completed, securing £9.8 million (our share) of annual income, supporting the valuation. At 30 September 2020, the portfolio was 5.2% reversionary.

 

Including rent from pre-lets and leases currently in rent free periods, the topped up initial yield of the investment portfolio at 30 September 2020 was 4.1%, ten basis points higher than the start of the financial year.

 

Whilst the overall valuation decreased by 6.6% during the six months on a like-for-like basis, elements of the portfolio continued to show greater variation. We continued to see office portfolio values outperform retail with our office properties decreasing by 2.4% compared to a 18.0% fall in retail values, as weaker retailer sentiment reduced ERVs. Furthermore, short leasehold properties (<100 years), which represent 15.1% of the portfolio, reduced in value by 9.9% compared to a decrease of 6.0% in the rest of the portfolio, as investor demand for shorter leasehold assets reduced. Our City, Midtown and Southwark portfolio produced the most resilient performance over the period, reducing in value by 4.6% on a like-for-like basis. Our joint venture properties fell in value by 8.7% over the period while the wholly-owned portfolio fell by 5.8% on a like-for-like basis.

 

The Group delivered a total property return (TPR) for the six months to 30 September 2020 of -5.1% (2019: 2.7%), compared to the Central London MSCI quarterly benchmark of -1.7%, and a capital return of -6.4% (versus -3.2% for MSCI). This relative underperformance resulted from our portfolio's greater than benchmark weighting to retail properties.

 

 

Our financial results

 

Our financial results are accompanied by graphics (see Appendix 3)

We prepare our financial statements using IFRS, however we also use a number of adjusted measures in assessing and managing the performance of the business. These include like-for-like figures to aid in the comparability of the underlying business as they exclude the impact of investment property additions and disposals and proportionately consolidated measures which includes the Group's gross share of the joint ventures. These metrics have been presented as management review and monitor the performance of the business on this basis.

 

We calculate net assets and earnings per share in accordance with the Best Practice Recommendations issued by the European Public Real Estate Association (EPRA). The recommendations are designed to make the financial statements of public real estate companies clearer and more comparable across Europe enhancing the transparency and coherence of the sector. We consider these metrics to be the most appropriate method of reporting the value and performance of the business and relevant reconciliations to the IFRS numbers are included in note 8 to the accounts.

 

In October 2019, EPRA issued new Best Practice Recommendations for Net Asset Value (NAV) metrics, these recommendations are effective for accounting periods starting on 1 January 2020 and have been adopted by the Group. The recommendations introduced three new NAV metrics: EPRA Net Tangible Assets (NTA), Net Reinvestment Value (NRV) and Net Disposal Value (NDV). We consider EPRA NTA to be the most relevant measure for the Group and the primary measure of net asset value, replacing the metric EPRA NAV as previously reported.

 

Valuation declines drive lower EPRA NTA per share

IFRS diluted NAV per share and EPRA NTA per share at 30 September 2020 was 800 pence per share, a decrease of 7.8% over the last six months, largely due to the 6.6% like-for-like decrease in the value of the property portfolio. The main drivers of the 68 pence per share decrease in NTA from 31 March 2020 were:

 

·           the decrease of 69 pence per share arising from the revaluation of the property portfolio;

·           EPRA earnings for the period of 8 pence per share increased NTA;

·           the final dividend of 8 pence per share reduced NTA; and

·           other movements increased NTA by 1 pence per share.

 

The EPRA NTA decline of 7.8%, combined with the payment of last year's final dividend of 7.9 pence per share, delivered a total accounting return for the six months to 30 September 2020 of minus 6.9% (2019: 2.7%).

 

At 30 September 2020, the Group's net assets were £2,026.7 million, down from £2,203.1 million at 31 March 2020, with the decrease largely attributable to the decline in property valuation. EPRA NDV per share was 798 pence at 30 September 2020 compared to 871 pence at 31 March 2020 (down 8.4%).

 

EPRA EPS lower due to reduced rental income

Net rental income from our wholly-owned properties was £30.6 million, down £8.9 million or 21.0% on last year. This reduction was primarily driven by:

 

·      achieving vacant possession in June from Bloomberg, ahead of our proposed development of 50 Finsbury Square, EC2, and the sale of 24/25 Britton Street, EC1 in the prior year; and

·      lower rent collection as a result of the disruption arising from COVID-19. For the first half of the year, we collected 83% of all rents charged leaving £7.6 million unpaid at 30 September 2020. We have assessed these balances for recoverability and provided £3.7 million in the Group, and £1.1 million (our share) in respect of joint ventures, as an estimated credit loss. The majority (79%) of this provision relates to balances with occupiers from the retail, hospitality and leisure sectors.

 

Joint venture fees were £0.8 million, down £0.5 million on last year due to reduced development fees on the sectional completion of Hanover Square, W1. Taken together, rental income from wholly-owned properties and joint venture fees totalled £31.4 million, down 23.0% on the prior period. Adjusting for acquisitions, disposals and transfers to and from the development programme, like-for-like rental income (including from joint venture properties) decreased 6.8% on the prior period, or 14.2% after estimated credit loss provisions.

 

Property costs reduced by £1.7 million to £2.8 million, principally due to reduced vacancy expenses and lower costs associated with our leasing initiatives in joint ventures. Administration costs were £12.9 million, a reduction of £0.8 million, primarily as a result of reduced provisions for performance related pay.

 

EPRA earnings from joint ventures (excluding fair value movements) were £4.6 million, a reduction of 14.8% from the prior year largely driven by increased provisioning for bad debts (see above).

 

Gross interest paid on our debt facilities was £5.4 million, up £0.5 million on the prior period. The increase in interest paid was due to higher average drawn balances on our Revolving Credit Facility (RCF) as we sought to increase our cash position given the potential market disruption from COVID-19. We capitalised interest of £2.8 million (2019: £2.9 million). As a result, the Group had underlying net finance income (including interest receivable) of £0.4 million (2019: £0.5 million).

 

EPRA earnings were £20.6 million, 26.7% lower than for the same period last year. Revaluation declines together with EPRA earnings resulted in an IFRS loss after tax of £154.8 million (2019: £44.1 million profit). The basic and diluted loss per share for the period was 61.2 pence, compared to 16.7 pence profit for 2019. Diluted EPRA earnings per share was 8.2 pence (2019: 10.6 pence), a decrease of 22.6%, and cash earnings per share was 6.4 pence (2019: 8.3 pence).

 

Results of joint ventures

The Group's net investment in joint ventures was £595.1 million, a decrease from £647.0 million at 31 March 2020, due to an 8.7% like-for-like decrease in value of the property portfolio partially offset by an increase in partner loan contributions to fund the Hanover Square development. Our share of joint venture net rental income was £7.2 million, down from £8.7 million last year primarily as a result of provisions made against doubtful debts of £1.1 million. The underlying joint venture profits are stated after charging £0.8 million of GPE management fees (2019: £1.3 million) with the reduction attributable to a cap in the development fee at Hanover Square, W1.

 

Overall, our three active joint ventures represent an important proportion of the Group's business. At 30 September 2020, joint ventures represented 25.2% of the portfolio valuation, 29.4% of net assets and 19.7% of rent roll (31 March 2020: 25.8%, 29.4% and 19.3% respectively).

 

At 30 September 2020, Group consolidated net debt was £402.3 million, up from £349.4 million at 31 March 2020. The increase was largely due to on-going development capital expenditure across the Group of £41.5 million in the six months. Group gearing increased to 20.2% at 30 September 2020 (31 March 2020: 16.2%). Including the non-recourse debt in the joint ventures, total net debt was £427.5 million (31 March 2020: £373.3 million) equivalent to a loan to property value of 17.2% (31 March 2020: 14.2%). The Group is operating with substantial headroom over its debt covenants. At 30 September 2020, property values would have to fall by around 63% before covenant breach. Due in part to both our very low levels of low cost debt and the treatment of capitalised interest under our Group covenants, our interest cover ratio for the year was once again not measurable. Excluding the benefit of capitalised interest, our interest cover was 17.1 times.

 

The Group's weighted average cost of debt, including fees and joint venture debt, for the period was 2.5%, 45 basis points lower than at 31 March 2020 due to higher average amounts drawn on our Revolving Credit Facility (RCF), our lowest rate financing. The weighted average interest rate (excluding fees) at the period end was 2.3%, up from 2.2% at 31 March 2020 as we reduced amounts drawn on the RCF towards the end of the period. At 30 September 2020, 86% of the Group's total drawn debt (including non-recourse joint venture debt) was provided on an unsecured basis (31 March 2020: 72%) and 75% was from non-bank sources (31 March 2020: 88%).

 

Continued active balance sheet management

In August 2020, we issued £150 million of new unsecured US private placement notes. The Sterling denominated notes cover 12 year and 15 year maturities (weighted average of 14.5 years) and have a weighted average fixed rate coupon of 2.77%. Funds were drawn on 5 November. The notes were placed with six investors, including two new lenders to GPE, and have identical financial covenants to the Group's other unsecured debt.

 

In October 2020, we repaid the £80 million (our share: £40 million) non-recourse debt facility in our Great Victoria Partnership (GVP), which was secured over Mount Royal, W1. Following repayment, the Group has no debt facilities in its joint ventures.

 

Pro forma for these refinancing activities, our cash and undrawn facilities will increase to £464.9 million (from £356.9 million at 30 September), our weighted average drawn debt maturity increases to 8.9 years (30 September 2020: 5.4 years, 31 March 2020: 5.8 years), our weighted average interest rate (excluding fees) will be 2.7% (or 2.0% on a fully drawn basis) and 98% of our committed debt will be on a flexible unsecured basis.

 

Taxation

The tax charge in the income statement for the half year was £nil (2019: £0.3 million) and the effective tax rate on EPRA earnings was 0% (2019: 1%). The majority of the Group's income is tax-free as a result of its REIT status. Other allowances were available to set against non-REIT profits.

 

As a REIT, the majority of rental profits and chargeable gains from our property rental business are exempt from UK corporation tax, provided we meet a number of conditions including distributing at least 90% of the rental income profits of this business (known as Property Income Distributions (PIDs)) on an annual basis. These PIDs are then typically treated as taxable income in the hands of shareholders. During the six months ended 30 September 2020, the Group paid PIDs of £20.0 million.

 

The Group's REIT exemption does not extend to either profits arising from the sale of trading properties or gains arising from the sale of investment properties in respect of which a major redevelopment has completed within the preceding three years.

 

Dividends

The Board has declared an interim ordinary dividend of 4.7 pence per share (2019: 4.7 pence) which will be paid on 5 January 2021. All of this dividend will be a REIT Property Income Distribution (PID) in respect of the Group's tax-exempt property rental business.

 

Principal risks and uncertainties

The Group recognises that the successful management of risk is critical to enable delivery of the Group's strategic priorities. Ultimate responsibility for risk rests with the Board but the effective day-to-day management of risk is integral to the way the Group does business and its culture. The Board undertakes a robust assessment of the principal risks facing the Group on a regular basis.

 

The principal risks and uncertainties facing the Group for the remaining six months of the financial year remain those detailed on pages 80 to 94 of the 2020 Annual Report with no material changes.

 

The duration and severity of the impacts of the COVID-19 pandemic on our business, and the UK government's policy response, continue to evolve. The Board and Executive Committee continue to regularly review the potential risks and impacts and the Group's response, including in relation to both short-term impacts and potential longer-term structural changes in working and retail practices and the level and nature of demand for space in central London. We continue to take steps to mitigate the threat and disruption caused by the pandemic, working collaboratively with our stakeholders, and we maintain our belief that London's appeal as a global business capital will persist for the long term.

 

The Board also continues to closely monitor the UK government's progress in resolving its future trading relationship with the EU, with the outcome of international trade negotiations remaining uncertain.

 

As a result of both the COVID-19 pandemic and Brexit, the Group's forecasts and business plans continue to be prepared under a variety of market scenarios to reflect a number of potential outcomes.

 

 

 

Condensed group income statement

For the six months ended 30 September 2020

Year to 31 March  2020 Audited £m						Notes			Six months to 30 September 2020 Unaudited £m					Six months to 30 September 2019 Unaudited £m
102.4				Total revenue		2			38.7					54.4
79.9				Net rental income		3			30.6					39.5
2.1				Joint venture fee income		11			0.8					1.3
82.0				Rental and joint venture fee income					31.4					40.8
(8.1)				Property expenses		4			(2.8)					(4.5)
73.9				Net rental and related income					28.6					36.3
(29.0)				Administrative expenses					(12.9)					(13.7)
(0.2)				Development management losses					(0.1)					(0.1)
6.4				Trading property revenue					-					6.5
(5.6)				Trading property cost of sales					-					(5.9)
0.8				Profit on sale of trading property					-					0.6
45.5				Operating profit before deficit from investment property and results of joint ventures					15.6					23.1
(52.6)				Deficit from investment property		9			(114.3)					(8.3)
57.9				Share of results of joint ventures		11			(56.5)					29.1
50.8				Operating (loss)/profit					(155.2)					43.9
7.3				Finance income		5			4.0					3.5
(6.5)				Finance costs		6			(3.6)					(3.0)
51.6				(Loss)/profit before tax					(154.8)					44.4
0.2				Tax		7			-					(0.3)
51.8				(Loss)/profit for the period					(154.8)					44.1
All results are derived from continuing operations in the United Kingdom and are attributable to ordinary equity holders.
20.0p				Basic (loss)/earnings per share		8				(61.2)p				16.7p
20.0p				Diluted (loss)/earnings per share		8				(61.2)p				16.7p
22.0p				Basic EPRA earnings per share		8				8.2p				10.6p
22.0p				Diluted EPRA earnings per share		8				8.2p				10.6p

      

 

Condensed group statement of comprehensive income

         For the six months ended 30 September 2020

Year ended 31 March 2020 Audited £m			Six months to 30 September 2020 Unaudited £m	Six months     to 30    September 2019 Unaudited £m
51.8		(Loss)/profit for the period	(154.8)	44.1
		Items that will not be reclassified subsequently to profit and loss:
(0.4)		Actuarial loss on defined benefit scheme	(2.5)	(2.4)
-		Deferred tax on actuarial loss on defined benefit scheme	-	-
51.4		Total comprehensive (expense)/income for the period	(157.3)	41.7

 

Condensed group balance sheet

At 30 September 2020

 

As at 31 March 2020 Audited £m			Notes	As at 30 September 2020 Unaudited £m	As at 30 September 2019 Unaudited £m
		Non-current assets
1,987.1		Investment property	9	1,904.6	2,049.1
647.0		Investment in joint ventures	11	595.1	597.4
7.5		Property, plant and equipment	12	7.0	8.2
0.2		Other investments	13	0.5	-
2,641.8				2,507.2	2,654.7
		Current assets
16.1		Trade and other receivables	14	23.1	13.5
0.5		Corporation tax		0.5	-
94.9		Cash and cash equivalents		7.2	12.4
111.5				30.8	25.9
2,753.3		Total assets		2,538.0	2,680.6
		Current liabilities
(60.0)		Trade and other payables	15	(54.0)	(52.9)
(60.0)				(54.0)	(52.9)
		Non-current liabilities
(444.3)		Interest-bearing loans and borrowings	16	(409.5)	(335.1)
(40.7)		Obligations under head leases	18	(40.7)	(40.7)
(4.8)		Obligations under occupational leases	19	(4.3)	(5.2)
(0.4)		Pension liability		(2.8)	(2.5)
(490.2)				(457.3)	(383.5)
(550.2)		Total liabilities		(511.3)	(436.4)
2,203.1		Net assets		2,026.7	2,244.2
		Equity
38.7		Share capital	17	38.7	39.5
46.0		Share premium account		46.0	46.0
326.7		Capital redemption reserve		326.7	325.9
1,792.3		Retained earnings		1,615.7	1,835.2
(0.6)		Investment in own shares	20	(0.4)	(2.4)
2,203.1		Total equity		2,026.7	2,244.2
868p		Diluted net assets per share	8	800p	868p
868p		Diluted EPRA NTA per share	8	800p	868p

 

 

Condensed group statement of cash flows

For the six months ended 30 September 2020             

 

Year to 31 March 2020 Audited £m			Notes	Six months to 30 September 2020 Unaudited £m	Six months to 30 September 2019 Unaudited £m
		Operating activities
50.8		Operating (loss)/profit		(155.2)	43.9
(2.4)		Adjustments for non-cash items	21	173.3	(20.6)
4.9		Decrease in trading property		-	5.6
(6.4)		Increase in receivables		(6.9)	(3.8)
4.8		(Decrease)/increase in payables		(6.2)	4.3
51.7		Cash generated by operations		5.0	29.4
(10.1)		Interest paid		(5.3)	(4.7)
0.6		Interest received		0.1	0.6
(3.6)		Tax paid		-	(3.6)
38.6		Cash (outflow)/inflow from operating activities		(0.2)	21.7
		Investing activities
4.6		Distributions from joint ventures		4.3	1.7
(56.9)		Funds to joint ventures		(2.0)	(49.0)
(18.0)		Investment in joint ventures		(3.0)	(6.0)
(64.6)		Purchase and development of property		(30.8)	(31.8)
(0.1)		Purchase of plant and equipment		(0.2)	-
(0.2)		Purchase of other investments		(0.3)	-
66.9		Sale of properties		(0.2)	3.9
(68.3)		Cash outflow from investing activities		(32.2)	(81.2)
		Financing activities
149.1		Revolving credit facility (repaid)/drawn		(35.0)	40.0
(2.8)		Payment of lease obligations		(1.4)	(1.4)
(127.8)		Purchase of own shares		-	(85.9)
(33.3)		Dividends paid		(18.9)	(20.2)
(14.8)		Cash outflow from financing activities		(55.3)	(67.5)
(44.5)		Net decrease in cash and cash equivalents		(87.7)	(127.0)
139.4		Cash and cash equivalents at 1 April		94.9	139.4
94.9		Cash and cash equivalents at balance sheet date		7.2	12.4